Risk and Benefit Management: A balanced approach

Mention the word “risk,” and most board and management types picture a media feeding frenzy, funding being pulled, and the collapse of civilization as we know it…at least as far as the organization’s future is concerned. Risk makes us feel unsafe because, by definition, it focuses on what can go wrong if we pursue a particular course of action.

But just as things can go wrong, outcomes can also be better than expected. Life is full of surprises, and some of those surprises are very good indeed. Risk management is not just about preventing the bad surprises, but also about maximizing the good surprises. It’s not just about putting out fires, but also about capitalizing on opportunities.

Risk management strategies use your resources and activities to prevent or reduce losses and to make gains for your organization. We’re going to look at three basic elements that put you in control of what happens as much as possible in an uncertain world. First, take the emotion out of the discussion. Second, identify the key risks and benefits. And third, manage both the risks and the benefits.

Take out the emotion

People are not rational when it comes to decisions with uncertain outcomes. First, an action’s risks stand out in people’s minds more than its benefits, so people tend to be loss averse.

How the situation is framed also affects us. In a series of studies, Daniel Kahneman and Amos Tversky demonstrated that when the choice was framed in terms of loss, people chose to risk a larger loss over a sure loss for the chance at a smaller loss. But when the choice was framed in terms of gain, people were risk averse, preferring a smaller, sure gain over a bigger, potential win. This was true even when the option chosen gave worse outcomes on average.

People also tend to see change as riskier than the status quo, because its risks and benefits are less well-known to them.

By taking the emotion associated with loss and gain out of your thinking, you can approach risk and benefit management in a more balanced way.

Identify key risks and benefits

When it comes to organizations, the important risks and benefits relate to the organization’s mission, money, reputation and the safety or well-being of people. When deciding whether to pursue a particular opportunity or engage in a particular activity, or operate a particular program, there are four corresponding questions to ask:

How may the action help or keep us from fulfilling our mission?

How may the action affect the money we have?

How may the action affect our reputation?

What impact may the action have on the safety or well-being of our staff, volunteers, members or clients?

In answering these four questions, don’t focus just on the risks—that’s your emotions talking—consider the benefits. Also, consider the possible impacts if you don’t pursue the opportunity or engage in the activity.

Once you’ve identified risks and benefits of both action and inaction, it’s time to pick out the ones that are most important to plan for. Two factors determine importance: degree of impact and likelihood. Curing a deadly or debilitating disease is a high-impact, positive outcome. Death of clients or volunteers is a high-impact, negative outcome. Most outcomes have much less impact.

Most people have a handle on impact, but either glaze over or freak out when asked to estimate likelihood or probability. Do you feel the panic starting to rise? Relax. Breathe. In most cases, there won’t be numbers to quantify the likelihood of a risk or benefit. Even when there are, such as the track record of a particular investment, past performance is a predictor but not a guarantee of future performance. So your discussion of outcome likelihood will usually involve terms like “pretty sure,” “rare” and “50-50.”

The key risks and benefits to manage are those that are identified as having a big impact or being highly likely or both. (For example, death can be highly unlikely, but if it has greater than zero probability, you’ll want to manage the risk nonetheless.)

Manage the risks and the benefits

Managing risks involves planning to make a negative outcome less likely, less costly or both. There are four basic strategies for dealing with potential risks; you can try to avoid, transfer, mitigate or accept the risk.

Avoiding the risk usually means not pursuing the opportunity or course of action. This also means missing out on whatever benefits might have followed.

Transferring liability or legal responsibility results from procedures like having participants sign waivers or release forms. A weaker version of the same strategy is communicating to make people aware of the risks without requiring a signature, such as when lotteries identify the number of prizes and the number of tickets to be sold. Organizational policies and procedures also work on this principle.

Mitigating risks means taking actions to reduce the likelihood of the risk or the size of its impact should it occur. For instance, a SWOT analysis identifies the internal strengths and weaknesses and the external opportunities and threats to an organization. An organization can draw on its strengths to mitigate a risk, just as it will want to make plans to ensure that its weaknesses do not increase the risk. In general, monitoring implementation and having a “Plan B” are the most common mitigation strategies. More specifically, having safety equipment and training staff in their use mitigate safety risks. Having an adequate financial reserve or money in the bank mitigates financial risks.

Finally, you can accept the risk. It’s unlikely that all risks can be avoided, transferred or mitigated. At some point the benefits will be valuable enough to an organization to accept a certain level and type of risk.

There are also four ways to increase the likelihood or impact of potential benefits; you can try to exploit, share, enhance or simply accept the benefits. Most of these strategies mirror those involved in managing risk. However, sharing the benefit is not as obvious. It involves partnering with another organization. This strategy generally reduces the resource load on your organization. Sometimes sharing the load increases the overall benefit, so that your organization gains more income, reputation, stakeholder well-being and mission fulfillment than if it acted on its own, because of the synergy produced by the organizations working together.